Welcome route for City growth

LET’S welcome the changes to financial regulations – the Edinburgh Reforms – unveiled on Friday. But let’s not expect any sudden boom in the industry, because this is about clearing the path to growth, not kick-starting it.

To understand why, you have to look at the City’s history. There has never been any central plan. No one has ever decided that London should become an international financial centre, still on some measures the largest in the world, ahead of New York.

Instead, it responds to market signals with extraordinary swiftness and brutal efficiency. So if there is a demand for some new financial service from anywhere in the world, there will be people in London who will figure out some way of providing it.

So the City – and let’s use that as shorthand for the complex web of financial, legal and business services generated in the West End and Canary Wharf too – originally made its money out of lending to the Government to finance wars.

The Bank of England was founded in 1694 to lend £1.2million to the Government at 8 per cent, and until well into the 19th Century, that was its largest business.

Then, through the Victorian era, came trade finance, and raising money to build railways and other infrastructure in the UK and around the world.

London was the world’s global development market. In 1914, it had to finance the Great War, while in the 1920s and 1930s it switched to funding UK industry.

From 1945 onwards, it was paying for the Second World War, when our debt to GDP ratio was over 250 per cent. Then in the 1960s, London invented the Eurodollar system, where banks began to deal in deposits, issue bonds and make syndicated loans in foreign currencies.

But our stock exchange business remained segregated, with a string of restrictive practices built up over years, including the fact that foreign enterprises could not buy the jobbers and brokers on the London Stock Exchange. That led to Big Bang in 1986, when we shifted our securities system to the US model – and let the foreigners in.

It is worth going through this history because London will always create new products and services, but also always lose business to other centres. There has been a lot of comment about losing out vis-a-vis Europe. There has undoubtedly been some shift, but actually Europe has never been a major market for the City, traditionally accounting for about 15 per cent of its activities. What matters is new business.

I have been more concerned about the limited share that London has garnered of that than losses of bog-standard stuff to Paris and Amsterdam.

It is true that some of the new businesses you really would not want to have. Mercifully, London has not been a hive of activity for crypto-currencies. We have not had the SPAC boom of New York. Those were the special-purpose acquisition companies, where promoters raised money to buy other companies without disclosing what they would do with the money – the so-called ‘blank cheque’ propositions. Most investors in SPACs have lost money.

But it is a genuine worry that innovation has been held back by clunky regulation, some of it associated with EU membership. That is where the Edinburgh Reforms come in. They are nothing like Big Bang. Rather they are a string of seemingly small tweaks to the regulatory system designed to clear blockages. I counted 22 bullet points on the Treasury handout, starting with ‘Reforming the Ring-Fencing Regime for Banks’, and ending with ‘Consulting on reform to the VAT treatment of fund management’. Will they have a radical effect? I don’t think anyone can know. After all, Big Bang did not turn out as expected, because the Treasury and the Bank of England both hoped that there would be several UK-owned enterprises.

As it happens, with the partial exception of Barclays, we don’t have any major UK-owned investment banking groups. The building society reforms of 1986 did not turn out as expected either. The societies were allowed to demutualise and launch on the Stock Exchange, but every single one that went public ended up being taken over.

But let’s not look for radical outcomes. Removing onerous regulation is a start. This is not only about boosting the international business of the City. It is also about better and cheaper services for us here. If there are errors in these reforms, let’s fix them. And if they combat some of the silly hostility to a vital industry, that will be a bonus too.

If there are errors in these reforms, then let’s fix them